• A Proposed Limitation by Bank Indonesia on Bank Ownership Looms on the Horizon
  • January 20, 2012 | Author: Emad H. Khalil
  • Law Firms: Gibson, Dunn & Crutcher LLP - Los Angeles Office ; Gibson, Dunn & Crutcher LLP - New York Office
  • Over the past ten years, Indonesia's commercial banking sector has been an attractive destination for foreign investors.  This has been in large part due to the Indonesian government's relaxed banking policy, which until now has been geared towards fostering foreign investment in the industry.  A proposed amendment to the banking policy, however, may have significant consequences for current and potential investors.

    Following the 1997 Asian financial crisis, the Indonesian government enacted Government Regulation No. 29 of 1999 regarding the Acquisition of Shares of Commercial Banks, which said that any entity could own up to 99% of an Indonesian commercial bank's shares.  Enacted to spur foreign investment and shore up the Indonesian economy following the crisis, the policy has been effective; almost one-third of Indonesia's commercial banks are majority foreign-owned or foreign joint ventures.

    Now, however, Bank Indonesia ("BI"), the central bank of Indonesia, has announced that it is considering restricting ownership by any single entity to 50% of the shares of any Indonesian bank.  Further, it announced that this policy will be applied retroactively, which means that any single entity that currently holds more than 50% of the shares of any bank will have to divest itself of enough shares to bring it within the 50% limit.  BI has temporarily barred mergers and acquisitions within the industry while it considers the move.

    BI officials state that the purpose of the proposed move will be to improve bank corporate governance and strengthen controls.  The perception within the industry, however, is that the proposed move will signal a reversal of the existing policy of welcoming foreign investment and that the results will be potentially damaging to the industry.  BI had earlier stated that it expected to implement the new policy before the end of 2011, but the end of 2011 has come and gone.  Uncertainty will remain high until BI makes clear its intentions.